Flagstar Bank Rebounds, But Hochul & ZoMa Make NYC Multifamily Toxic

December 15, 2025 | Earlier in the year, we added some shares of Flagstar Bank (FLG) to our portfolio after spending much of the previous year watching slow but steady the progress of this $90 billion asset bank located in Hicksville, NY. In fact, FLG is currently the only bank common we own after taking profits in American Express (AXP) in July. Our friend Jim Cramer is not quite right. Banks are not cheap presently, but sometimes they become cheap. Wait for it.

Source: Google

The predecessor of New York Community Bank, FLG is now led by former OCC chief Joe Otting and a group of new directors and managers comprised largely of managers from Flagstar. Suffice to say that had NYCB not merged with Detroit-based Flagstar in December 2022, the old NYCB probably would have failed along with Silicon Valley Bank, First Republic Bank and Signature Bank in Q1 2023.

The problem then and now is multifamily real estate, the new subprime asset class for many banks owing to the inability of tenants to pay escalating rents. Inflation is the enemy of all but is particularly the nemesis of commercial landlords, who face shrinking net operating income (NOI) due to growing political angst over rising rent costs. NOI as we discussed many times in The IRA, is what determines the value of commercial property.

In our earlier comment (“Will Flagstar Survive ZoMa and Rebound? We Like the Leverage…”), we noted that salon Marxist Zohran Mamdani has promised to freeze rents in NYC rent stabilized apartments, an act of convenient theft against landlords who have no control over inflation. But truth to tell, New York mayors have mostly rhetorical powers. The actual authority to make such changes lies with the governor in Albany.  Since the FOMC has now seemingly decided that 3% inflation is acceptable, rents can only go higher.

As a result, FLG and other New York banks are watching to see if the Republicans can knock out the unpopular Democrat incumbent Kathy Hochul in an anticipated race with U.S. Representative Elise Stefanik. But regardless of who wins next year, we think that FLG is ahead of the game in terms of reducing exposure to toxic NYC multifamily assets vs other lenders in that politically impaired market. Truth is, low income families cannot afford to live in New York City without massive public subsidies.

One of the reasons why we like the leverage in FLG is that CFO Lee Smith, who ran a national mortgage business for Flagstar, is growing capital and net interest margin as interest rates fall. Many of the bank’s multifamily loans have reset provisions that will either see the margin on these assets grow or the borrowers go elsewhere for mortgage finance.

As a result, the bank has provided guidance to the Street (see chart below from Q3 earnings) showing NIM growing along with CET1 capital over the next year.  The average NIM for community banks in Q3 2025 was 3.7%, the FDIC reports, so FLG has plenty of room on the upside to improve beyond current guidance.

One of our early concerns with NYCB going back to 2024 was the relatively low yield on loans and leases, but Smith and the team at FLG are working aggressively to change that dynamic. Net interest margin at FLG is projected to modestly move higher in 4Q’25 and beyond driven by a number of factors:

• Funding costs expected to decline further in 4Q’25 and 2026

• Yield on multi-family loans resetting higher 300 to 350 bps

• New asset growth in higher yielding assets outside NYC market, and

• Further reduction in non-accrual loans in legacy portfolio

We don’t minimize the challenges facing FLG and other NYC lenders, but we are encouraged by several factors. First, the near-failure of NYCB and the rescue led by Joe Otting and former Treasury Secretary Steven Mnuchin allowed the bank to clean house more than a year ago, eliminating the legacy board and many of the managers who ignored the alarming deterioration of the once prime value of New York City multifamily assets.   

At first, we (and many others) thought that a mere $1 billion in new capital was too little downpayment to fix the bank's problems, the former Flagstar team has already made radical changes to the bank’s troubled loan portfolio and also sold the residential mortgage servicing business to Mr. Cooper (now Rocket Companies (RKT)) and the #2 ranked wholesale warehouse lending business to JPMorgan (JPM), two trades which may look very astute in coming years. 

Let’s face it, board director Steve Mnuchin is not known for his great love of residential mortgage risk, so while some observers (ourselves included) were disappointed to see Flagstar shed the top-ten national residential loan and securitization business, the timing was very astute and allowed the bank to monetize both assets at top dollar.

With a growing number of multifamily property owners facing default in 2026, regardless of what ZoMa does or does not do in terms of a rent freeze, lightening up on credit exposures for all residential assets – single family and subprime multifamily assets in NYC – seems like a good idea for banks. Indeed, Flagstar Financial, could be "attractive" acquisition target, CEO Joseph Otting said earlier this year at an industry conference. We agree.

Multifamily: The New Subprime  

FLG is not the only bank around the US to recognize the growing political exposure of multifamily assets. We don’t think future political changes in Albany or other blue states are going to alter the negative trend in terms of credit outlook for multifamily assets in major cities like New York. The huge disparity between the average performance of the $650 billion in bank-owned multifamily assets and the $3.6 trillion in prime bank first and second lien residential single-family loans tells investors all they need to know about such properties. 

Beyond the $650 trillion in bank owned apartment loans, there are trillions more in inferior multifamily assets owned by HUD, the GSEs and commercial mortgage backed securities (CMBS) investors.  The fact that HUD, Fannie Mae and Freddie Mac are reported to be buyers of multifamily loans in markets like New York makes us wonder. When will the taxpayer will be forced to restructure loans inside major blue cities like New York, Chicago and other markets where socialist candidates hold positions of authority?

Source: FDIC/WGA LLC

The rate of net loss or loss given default (LDG) on relatively prime bank-owned multifamily loans immediately normalized to 100% of the loan amount before President Joe Biden had even declared the COVID emergency to be over. Nobody in Washington thought to help commercial landlords who had to finance federal and state loan and rent moratoria by concerned socialists like ZoMa and NY Governor Kathy Hochul. 

But to be fair, it was President Donald Trump who declared the federal crisis in 2020 that allowed loan forbearance. Team Trump worried not at all about how the residential and multifamily markets would finance hundreds of billions of dollars annually in loan and rent forbearance. Only the fact of massive purchases of Treasury debt and mortgage securities by the Federal Reserve Board in 2020-2021 generated the cash float needed to finance residential loan forbearance, but many commercial property owners took a total loss. 

The 50% increase in home prices since 2020 represents the cost of COVID loan forbearance, which resulted in a massive flow of purchase and refinance loan volumes. Had the Fed not dropped the hammer on interest rates in March 2020 and enabled an explosion in lending volumes, one out of every five residential mortgages might have defaulted and gone to foreclosure. The impact on housing and the US financial system would have looked like the mid-1920s, as we described in our previous comment.

The financial cost of the individual and business shock of this wave of such a large surge in loan defaults would have pushed the US into a 1930s style debt deflation, with banks and nonbank lenders failing and the US forced to backstop the guarantee on trillions in government insured MBS. The GSEs, likewise, would have been forced to absorb the cost of two years of conventional loan forbearance, an event that might have pushed one or both GSEs into default. 

Across nearly all capital sources, multifamily delinquency rates have been rising throughout 2024 and 2025 due to factors such as higher operating costs (insurance, taxes), elevated interest rates, and increased supply of new apartments in some markets, which has led to higher vacancy rates and rent concessions. Lower interest rates will help in terms of refinancing for stronger properties, but forbearance remains the rule for many urban multifamily properties. 

Source: FDIC/WGA LLC

While the allocation of 1-4 family loans on the balance sheets of US banks has fallen dramatically, the portion allocated to multifamily assets has ranged between 3-5% of total loans going back half a century. Today the trend is definitely headed lower. The assets owned by banks tend to be the better quality loans, while the inferior borrowers go to the CMBS market or HUD and the GSEs in descending order of quality.  Yet given the demographic changes in the US economy over the past five decades, multifamily assets ought to be a larger share of total bank loans.

"Delinquency rates for apartment commercial mortgage-backed securities fell 14 basis points to 6.98% in November, after topping 7% in October for the first time since December 2015, according to a report from data firm Trepp," reports Multifamily Dive. "After rising 23 bps in October, the Trepp CMBS delinquency rate for commercial real estate fell 20 basis points to 7.26% in November. It has only fallen three months this year. The delinquent balance rose $5.8 billion to $603.9 billion."

These figures are a concern, but looking at the unusually low FDIC figures for other real estate owned (REO), we think it is safe to conclude that reported delinquency rates for many multifamily assets in blue, politically exposed markets are understated due to forbearance from lenders. And most lenders no longer report when a loan is subject to forbearance. But the growth in income earned but not collected suggests that some of the other metrics are understated.

Source: FDIC

“The delinquency rate for commercial mortgages increased in the second quarter of 2025 across most major capital sources,” said Reggie Booker, MBA’s Associate Vice President of Commercial Real Estate Research. “The largest increase was among CMBS loans, driven by rising delinquencies in both multifamily and office properties. Delinquency trends continue to reflect differences in property type, loan structure, geography, and borrower profile.”

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